“preview provision under competition”

“Preview Provision under Competition”

Yi Xiang and David SobermanApril 2012

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1. Introduction2. Literature Review3. Objectives of the Analysis4. The Model Structure5. The Analysis and Findings6. Conclusion

Agenda

D. Soberman, Rotman School, University of Toronto


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Motivation◦ Based on a hypothetical couple◦ Based on real newspapers in the Toronto area◦ Based on the information these papers contained

April 30, 2009 The Basic Question and the Context for its

relevance

Introduction


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AnecdoteJohn is a law clerk who works downtown Toronto, and Sarah, his wife is a hospital administrator. They each buy a newspaper everymorning on their way to work. The day is April 30th, 2009 and onthe previous evening and this morning, John and Sarah discussed howswine flu was going to affect Sarah's work at the hospital. Inparticular, the conversation focused on Sarah's ability to get homein time to meet the children after school. On their way into thesubway, both Sarah and John make their choice between twonewspapers, the `Toronto Sun' and the `Globe and Mail', which theyview in the newsstand. Sarah is interested in learning more about the spread of swine fluand is curious about how this will affect her family's life over thenext few days. On the other hand, John has heard more than enoughabout swine flu (in fact, it was all Sarah wanted to talk about). Tostart his day, he wants to read about other things.


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There are many different layouts for newspapers as shown in the attached pictures


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Here’s what John and Sarah saw at the newsstand.


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Here’s what John and Sarah saw on the newsstand.


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The Sun’s format makes it clear that there is significant information about Swine flu inside◦ 9 stories inside about Swine flu◦ More than 3 full pages of stories◦ The front page clearly indicates where to find the stories

The Globe’s format makes it more difficult to find out what is inside. There is a story on Swine flu but◦ Only 3 stories about Swine flu◦ Only one page (total) of stories on Swine flu◦ The front page does not indicate where to find the

stories

Key Observations


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From the story, it seems John would choose the Globe and Sarah the Sun.

It also seems that the format and the information provided to the consumer (before buying) had a significant impact on consumer choice.

A news provider can choose a format that provides a very precise indication of what is inside

A news provider does not have complete control of the information that is generated each day

Interpretation


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Previews for products can take many forms◦ The front page of many publications◦ Previews aired several hours before a programme

is scheduled to air◦ Early descriptions of product characteristics for

products like wine and whisky◦ The packaging of many products which describes

what is inside

The Basic Question


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For many products the preview is an important ingredient to consumer decision making.

Marketers can design previews to be either1. Highly informative of the product

characteristics.2. Generic previews that do not necessarily

indicate the unique characteristics of the product.

The Basic Question cont’d


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versus


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There are some categories where the marketer does not have complete control of the product attributes.◦ They are generated by a random process of some kind◦ This is not the norm: generally marketers do have control of

the product attributes. Categories where this seems to apply include

◦ News products (magazines, newspapers, news reports on TV and/or radio)

◦ Chateau bottled wine where the weather and nature have a significant impact on each year’s vintage.

◦ Ski resorts where the weather has a significant effect on the quality of skiing that patrons will encounter

◦ Resorts (near national parks) e.g. Denali or Kruger, regarding the types of animals that will be present on a tour



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When firms design previews for their products (that can communicate positioning) and do not fully control product positioning, will they choose to provide informative or uninformative previews?

Will the choice depend on the degree of competition experienced by the firm?

Will the choice depend on the timing of the game?

In a nutshell


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The timing of the game◦ Preview design, pricing, positioning revealed

Daily newspapers◦ Preview design, positioning revealed, pricing

Less frequent informative publications◦ Positioning revealed, preview design, pricing

Previews of wine that is ready to bring to market This also will serve as a useful test of the

robustness of the findings

In a nutshell


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Related to the literature on media competition◦ Coase (1974), Besley and Prat (2006), Stromberg

(2001)◦ Compete based on the accuracy and

informativeness of news Related to the literature on news as an

entertainment good◦ Gabszewicz et al (2001), Hamilton (2003), Xiang

and Sarvary (2007)◦ Positioning, slanting, media bias

2. Literature Review


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Related to the literature on informative advertising◦ Butters (1977), Grossman and Shapiro (1984),

Robert and Stahl II (1993)◦ People only buy if they are informed about the

position Related to the literature on information

revelation◦ Jovanovic 1982, Shavell 1994, Chen and Xie 2005◦ Information revelation is strategic and depends on

nature



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How clearly do I let consumersknow what is inside?(Information revelation)Consumer have

preferences for certain stories(Media is entertainment)

Media Competition


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2.Literature Review

How clearly do I let consumersknow what is inside?(Information revelation)

The Preview lets the consumer know about the position but does not activate the consumer(Informative Advertising)

Media Competition

Consumer have preferences for certain stories(Media is entertainment)


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In a market where product positioning is determined by an exogenous random process, will a monopolist choose to communicate its precise location through a preview?◦ Does it depend on whether the monopolist sets price

before the position is revealed or after? In a market where product positioning is

determined by an exogenous random process, will competitors choose to communicate precise location through previews?

What is the equilibrium preview design outcome under competition?

3. Objectives of the analysis


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How are firm profits affected by preview design strategy?◦ Do firms lose or gain by having the capability to

provide informative previews. Will the results of the analysis change if

◦ Prices can be set after the revelation of positions instead of before

◦ Product design strategy can be chosen after the revelation of product positions

3. Objectives of the analysis


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One or two firms compete in a linear market where products can be positioned from (0,1)

Consumer are uniformly distributed along the market in terms of their preference for positions.

4. Model Structure


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4. Model Structure


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Consumers incur a benefit (associated with their ideal news story) less the travel cost (due to the story not being ideal) less the price charged by the firm.

Consumers decide whether individual rationality is satisfied:◦ CS=v-td-p>0 where v is the benefit for an ideal news

story, t is the travel cost, d is the distance from the consumer to the position of the news story, and p is the price charged

When there are two firms, the consumer chooses the product that provides the most surplus

4. Model structure


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The timing of the game1. The firm chooses a preview strategy2. The firm sets price3. The firm receives a random draw from the

market4. Consumers make a decision which product to

buy and profits are realized.

4. Model structure


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1. The Firm chooses a preview strategy◦ The firm chooses q ε (0,1). When q=0, the preview is

uninformative. When q=1, the preview is perfectly informative.

◦ The base model considers a binary choice q=0,1 with zero cost for either choice

We later examine continuous q and the impact that costs might have on the outcomes

◦ An uninformative preview can be thought of as a generic message about the category that does not provide details on the product attributes

◦ This is akin to choosing the front page style. Does it quickly and clearly communicate to the potential buyer (within 5 sec) what is inside?

4. Model Structure


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2. The Firm sets price.◦ The firm sets a price for its product knowing its

own preview strategy◦ When the firm has a competitor it knows the

preview strategy employed by its competitor (these are both long term decisions) when it sets price.

◦ The price is posted and consumers are informed of the price when they make a decision.

◦ The profit of firms is the product of demand and the price charged (the cost of the product is normalized to zero for all firms)

4. Model Structure


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3. The firm receives a random draw from the market

◦ Nature generates a random draw from the market

◦ When there are two firms, the draws are independent.

◦ The position (chosen by nature) is transmitted (or not) by the preview to potential buyers

4. Model Structure


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Admittedly, for the news category, the same world generates news content but

◦ Newspapers have journalists in different places generating different content

◦ The managing editor needs to make choices about which stories will receive top emphasis

This choice is made without knowing what content will be emphasized by the competitor

4. Model Structure


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4. Consumers make a decision which product to buy and profits are realized.

Based on the expected location of the product and its price, each consumer assesses the utility of the alternatives

Monopoly: buy or not buy Duopoly: buy from Firm 1,buy from Firm 2, not buy

When the preview is informative, the consumer knows the location. When the preview is uninformative, the consumer forms expectations about the content

The consumer is aware of the distribution that generates content and knows her own preferences.

4. Model Structure


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◦ Consider a situation where q=0 (uninformative) or 1 (informative). When the timing is Preview design, pricing, positioning

revealed The monopolist earns when the preview is

uninformative When the preview is informative, the monopolist sets

p= when to earn profits of

p=v-t when v>3t to earn profits of v-t These profits are strictly less than the profits earned by

being uninformative. The monopolist does not gain by providing an informative

preview.

5. The Analysis and Findings

2tv

2tv ttv 3,2

ttv8

2


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◦ Preview design, positioning revealed, pricing Less frequent informative publications

The monopolist earns when the preview is uninformative

When the preview is informative, the monopolist sets p=v-ty when y<½ and p=v-t(1-y) when y>½ to earn

profits v-ty or v-t(1+y). The expected profits are with a maximum profit of

These profits are strictly less than the profits earned by being uninformative.

The monopolist does not gain by providing an informative preview


2tv

43tv

2tv


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Intuition◦ When a firm does not face competition, its

objective is to be as optimally located as possible i.e. y=½.

◦ This allows it to charge the highest price possible and still satisfy the individual rationality constraint of all consumers.

◦ The expected location without previews is the optimal location for a monopolist and this is precisely why she does not have an incentive to inform consumers about her location.



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When the timing is Preview design, pricing, positioning revealed, what happens when firms face competition? The products are perceived to be homogenous without previews

Bertrand competition leads to profits of zero When one firm chooses an informative preview, it earns an expected

profit of

This is clearly better than zero. The competitor however, earns an expected profit of

In a nutshell, uninformative previews cannot be an equilibrium Interestingly, a firm’s decision to implement informative previews

conveys a positive externality on the competitor.


.288169 t

.288121 t


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When both firms choose informative previews◦ The products are now perceived to be different◦ The firm set prices in order to maximise profit

given the expected distance between the firms◦ Firm profits are t/2. ◦ This implies that the discrete game has an

asymmetric outcome where one firm chooses to provide informative previews and the other does not



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Do the findings change when the timing is different i.e. Preview design, positioning revealed, pricing The profits earned when previews are uninformative do

not change Products appear undifferentiated so profits are zero

When one firm provides informative previews and the other does not then the firm with informative previews earns and the competitor earns

When both firms implement informative previews the profits of each firm are


t216127

t10855

t21691


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informative

uninformative informative

Firm 1

Firm 2

0,0

55108

55108t t,

91216

127216

t t,

127216

91216

t t,


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The findings are unaffected by the timing though firms that utilize informative previews are more profitable◦ Being able to set price after position is revealed

allows firms to manage competition more effectively◦ Nevertheless, the findings are unambiguous.

One firm will implement informative previews to reduce competition

The other firm has no incentive to reciprocate. Once a competitor makes its position clear. The expected position of y=½ is preferred to the actual position The best response to a competitor with informative previews

is to utilize uninformative previews.



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Are these findings due to the discrete nature of the base model i.e. q=0 or 1.

What happens if we allow q to be continuous for both firms?◦ Will firms choose an intermediate level of preview

precision (and hence lead to a symmetric equilibrium) or will an asymmetric outcome survive?

◦ What are the precise characteristics of the asymmetric outcome?



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The challenge with this problem is that there are there are multiple cases that need to be solved◦ qi=0 and qj∈ (0,1)◦ qi=1 and qj∈ (0,1)◦ qi ∈ (0,1) and qj∈ (0,1)

Already solved in the simple case◦ qi=0 and qj=1◦ qi=0 and qj=0◦ qi=1 and qj=1



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For each firm when qj∈ (0,1), we assume that a fraction q are informed and a fraction 1-q are uninformed.◦ This means that when qj∈ (0,1) for i=1,2, we have

four groups of consumers uniformly spread along the market Fully informed, D1: q1q2 Informed about the location of 1, not 2, D2: q1 (1-q2) Informed about the location of 2, not 1, D3: q2 (1-q1) Uninformed about both firms, D4: (1-q1 )(1-q2)



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From this we construct the objective functions for both firms:

These are optimized simultaneously with respect to p1 and p2 which means that for each pair of q1 and q2 we can find the optimal prices

We then work backward to determine the optimal choice of q for each firm


4433221122 1111 fDfDfDfDp

4433221111 fDfDfDfDp


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When q1>>q2

A pure strategy equilibrium in prices results and the calculations are straightforward


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When q1 is only somewhat larger than q2

A mixed strategy equilibrium in prices results and the calculations are complicated


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The equilibrium is for one firm to provide informative previews and the other firm to provide uninformative previews◦ When the cost to increase q is 0, the equilibrium outcome is

qi=0 and qj=1◦ When the cost of to increase q is positive then the

equilibrium outcome is is qi=0 and qj>0◦ This underlines the general finding that

The decision of one firm to provide informative previews releases firms from a Bertrand trap

The competitor benefits even more than the focal firm when the focal firm provides informative previews

The competitor has no incentive to respond by creating informative previews of its own



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We also examine the third alternative in terms of timing◦ Positioning revealed, preview decision, pricing◦ A wine producer decides on the “amount of

information” to be provided in its preview◦ In France, this may amount to a decision of

whether to list on sites such as http://blog.midi-vin.com and/or www.bienmanger.com


http://blog.midi-vin.com/


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The findings here are similar◦ At least one firm has an incentive to provide an

informative preview◦ The best response of the competitor is to provide

an uninformative preview◦ Perhaps this explains why less than 50% of the

registered vineyards in the Midi-Provence region of France are listed on http://blog.midi-vin.com


http://blog.midi-vin.com/


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We have examined the question of preview provision in a context where product positioning is not in the control of the producer

The optimal policies are affected by the degree of competition◦ Monopolists do not have an incentive to provide

informative previews A key assumption is that the preferences of consumers

are evenly distributed across the range of products that the monopolist can provide

◦ In contrast competition creates a strong incentive to utilize informative previews.

6. Conclusion


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When one firm implements informative previews, the competitor has no incentive to reciprocate with the same strategy

The decision to implement an informative preview confers a strong positive effect on the competitor.

The decision to implement an informative preview effectively gifts half the market to the competitor.

Symmetric preview strategies should not be observed

These findings are robust to alternate timings and continuous decisions about preview precision

6. Conclusion


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Limitations◦ In this model, previews only affect how consumer choose

between products. They have no effect on the creation of primary demand

◦ The model may have limited application to a market where consumers make long term commitments to products (like subscriptions). Here previews may play a different role.

◦ When repeat purchasing is important, the consumption experience is generally part of product evaluation. Our model implicitly assumes that the consumption experience of the two products is equal.

◦ In the news market, many factors may contribute to the quality of the consumption experience including product design. Our model does not account for this.

6. Conclusion

“preview provision under competition”

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